This week's Global Market Analysis comes from Europe and looks at how the long delays at the Panama Canal are doing to the global LPG market.
LPG Wrap: USA-Asia arb open despite soaring freight; delays hit Panama Canal transits
By Virginia Bridgewater and Arran Brodie
Sky-high US-Asia freight rates and long delays at the Panama Canal are dominating the global LPG market, while demand in North West Europe has been met increasingly by local supply.
While global petrochemical production remains relatively sluggish as gas prices put pressure on industry, the US-FEI arb continues to widen - despite the spiralling freight rates currently at more than double last year’s prices.
Easily the biggest driver in the market for a while now, Houston-Chiba freight rates are still increasing rapidly, which has been putting off many traders as netbacks are squeezed.
Last week freight rates hit $200/MT for the Houston (USA) to Chiba (Japan) route, putting profits at over $100,000 per day. There are reports that $215/MT has been fixed for the Ronald M, a Panamax, to Sunoco in the third decade of December. For context, this time last year, spot rates averaged $99/MT for the Houston-Chiba route.
Meanwhile, Panama Canal delays, currently at around 24 days northbound and 16 days southbound, are causing significant delays to December arrivals. LPG cargoes are periodically shunted to the back of the queue to make way for other products, such as crude. During the latest backlog, while more than one LPG carrier has paid up to $2m to jump the queue, traders question how worthwhile that is in the current climate. With freight still spiralling, the risk remains that by the time the cargo arrives in the East, the premium will have fallen away, thanks to the freight rates squeezing the profit margins.
Last week the market expected to see a draw on propane stock levels, considering how close to winter we are getting. But instead, there was a small but significant build of just over 1mn bbl to 89mn bbl on 18 November, according to the weekly EIA inventory numbers, up from 87.8mn bbl the previous week. This puts stocks up nearly 18% on last year, and 5mn bbl above the rolling five-year average. This is down to early buying against rising energy prices in the face of approaching Russian sanctions. Stock levels are expected to deplete rapidly, however, as cold weather starts to grip parts of Europe and the US.
Over in northwest Europe the market has firmed a little, thanks to the US-Asia arb drawing product east, despite the double challenge of freight and shipping delays.
December demand has firmed somewhat after a fairly slack start to Q4, with values languishing at discounts to paper until the start of November. There is buying interest during the trading window, although not particularly urgent even as temperatures start to drop, albeit gradually.
The front end of the propane forward curve has steepened since the start of October, with the back end remaining steady, boosted only by higher outright values.
A fall in natural gas prices has led to less spiking of the natural gas stream, leaving more product available at northwest Europe terminals to sell into the region and keeping demand for US product relatively muted. On top of this, with the end of the year approaching, stocks are expected to be run down, with a tender last week from BASF CIF Antwerp specifying Jan 1-3 dates for that reason.
Blending and stocks in Europe
The volume of butane blended into gasoline in northwest Europe fell in October to 103,000 b/d, down from 143,000 b/d in September, against a five-year average of 167,400 b/d. LPG stocks fell slightly to 15.2mn bbl in October from 15.6mn bbl in September. However this still puts them 4mn bbl higher than October 2021 and 2mn bbl above the five-year average, thanks to early stockpiling for winter in the face of rising energy prices.
Early buying is also likely to be a factor in putting the Q4 physical propane-naphtha spread back into normal realms, directly contrasting with the pro-nap spread from the previous year. It has remained consistently negative throughout Q4 2022, slowly climbing towards flat, while 2021 saw an unusual positive pro-nap spread which steadily slipped.
Crack to crude
November has seen little movement in Propane NWE CIF Large Cargo prices, remaining within a $24/MT range over the first three weeks of this month. This has seen the propane crack to crude climb $18/bbl since its November low of -$51/bbl. The butane crack to crude has risen as well, however at a much slower rate, due to butane NWE CIF Large Cargo outright prices slipping alongside naphtha.
Amid a slate of bullish factors, in a bearish move, China has also begun exporting more diesel, having previously curtailed exports to cool prices in the domestic market.
How to solve a problem like Russian diesel?
The recent fall in butane prices has seen it weaken relative to propane; however, this is off the back of a much stronger October for butane this year compared to last. The spread between propane and butane started this quarter at $78/MT, a stark contrast to a year ago, when it sat at -$74.75/MT. In recent weeks the spread has fallen much more in line with last year.
Overall, there are no obvious big positions to be fulfilled in northwest Europe between now and the end of the year, while discussions are ongoing about the implementation of the region’s ToT22 contract.
On a global level, there are variable fundamentals such as a very cold winter, a relaxing of Covid measures in China, or an opening up of PDH unit production that could create a sudden pull from Asia. An unfortunate concurrence of all three is what is most likely to rock the boat significantly by year end. Only time will tell.